EUR/USD trades firmer near 1.0350 as traders brace for German Retail Sales, FOMC Minutes
- EUR/USD edges higher to around 1.0350 in Wednesday’s early European session.
- Solid US economic data supports a Fed rate pause, which could lift the USD.
- Markets expect aggressive rate cuts by the ECB in 2025 despite the rise in inflation.
The EUR/USD pair gains ground to near 1.0350 during the early European session on Wednesday. However, the potential upside of the major pair might be limited amid the prospects for slower interest rate cuts by the Federal Reserve (Fed) in 2025. The Federal Open Market Committee (FOMC) Minutes will be closely monitored later in the day.
The upbeat US economic data could give the US central bank ample room to continue leaving interest rates higher for longer, supporting the Greenback. The US Services Purchasing Managers Index (PMI) rose to 54.1 in December versus 52.1 prior, according to the Institute for Supply Management (ISM) on Tuesday. This reading came in above the market consensus of 53.3. Meanwhile, US JOLTS Job Openings increased to 8.09 million in November, compared to 7.83 million in October. The market expected 7.7 million Job Openings in November.
Additionally, hawkish comments from the Fed officials might contribute to the USD’s upside. Federal Reserve Bank of Atlanta President Raphael Bostic said on Tuesday that inflation is expected to gradually decline this year to the Fed’s 2% target. However, Fed policymakers should be cautious with policy decisions given uneven progress on lowering inflation and err on the side of keeping interest rates elevated to achieve their price stability goals. Earlier on Monday, Fed Governor Lisa Cook noted Fed officials can move more cautiously with interest rate cuts, pointing to a sturdy labor market and sticky inflation.
Across the pond, markets continue to anticipate aggressive European Central Bank (ECB) rate cuts in 2025 despite the rise in inflation. This, in turn, might exert some selling pressure on the Euro (EUR) against the USD. The ECB is expected to cut rates by 25 basis points (bps) at the next meeting on January 30. For the whole year, traders are expecting slightly more than 100 bps of cumulative cuts.
Later on Wednesday, traders will keep an eye on the German Retail Sales, along with the Eurozone Consumer Confidence and Producer Price Index (PPI). If the report shows a stronger-than-expected outcome, this could lift the shared currency.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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